Q: My partner and I may wish to downsize and move to a smaller home when we retire. But we’re also very comfortable in our current home, even though it’s a bit large for our needs. How do we decide to stay or move into something smaller?
A: Thanks for this great question! Most retirees need to deal with this housing dilemma — some right away, while others hold off. Evaluating your options in a calm, thoughtful manner will hopefully help you make a comfortable, confident decision.
Where and how you choose to live out your retirement years could be one of your most important decisions. Choosing whether to relocate or to stay rooted in your hometown, to remain in your current home or to trade down to a smaller residence are important questions that involve a host of lifestyle and cost-of-living issues.
Making a move
Selling your existing home and relocating to a more affordable house or condominium may be a reasonable option if you have considerable home equity and the shift won’t negatively affect your lifestyle.
To help sort through your own lifestyle preferences, make a list of your values — those things that are important and meaningful in your life — and then determine your highest priorities. Those are the elements you’ll want to incorporate into your retirement lifestyle choices.
- Proximity to family/friends — If you value family and friends above all else, then proximity to your loved ones likely will be a key factor in your location decision.
- Availability of health care — If fitness and good health are things you value strongly, then you’ll want to live in an area where quality health care and a variety of recreational activities are available.
- Small town vs. city living — Do you prefer the sense of community you get from living in a small town or rural area or do the hustle and bustle of city life — with its cultural opportunities, restaurants, shopping and public transportation — better fit your style?
- Climate — Although weather is no longer the prime consideration for today’s retirees, it does play a role in the location-decision process. Some people may yearn for year-round sunshine, while others enjoy the richness of a four-season climate.
Ideally, you should consider these and other lifestyle factors before you examine the financial implications of your location decision.
The cost of living is a big factor to consider when researching a retirement location — particularly for retirees who rely on a fixed monthly income.
When researching new locations, remember to investigate the overall housing costs in the desired area. For example, real-estate values and property taxes typically vary considerably by locale. Be sure to check the rates for property taxes as well as income and sales taxes and compare them to where you currently live. You may be surprised to discover that states with no income taxes — such as the traditional retirement haven of Florida — often make up the difference with higher property and sales taxes.
Deciding on retirement living arrangements involves a host of issues that you will need to weigh carefully. In making the decision, give yourself plenty of time and do as much research as possible.
Stay in your current home: If your lifestyle needs will best be met by staying put, consider the financial implications of that decision. For instance, if the mortgage on your home is paid off, your housing expenses will probably be much lower than you’d find in a different living arrangement. Since you may be in this house for another 20 years or more, consider investing in some home improvements, such as insulation, a second bathroom or even converting a large single-family home into a two-family home for rental income.
Sell your home: This decision depends greatly on whether you need to raise money from the sale of your home. If your expected income from Social Security, pensions and other sources falls short of your requirements, then you probably have little choice but to tap your home equity.
Selling your house may provide enough cash to defray your new housing costs and potentially provide additional funds to use as you please. Note that married couples can exclude up to $500,000 in capital gains from the sale of a primary residence (single homeowners can exclude $250,000)1. This rule can be beneficial for retirees who own highly appreciated residential property, as long as they have owned and used the home as a primary residence for at least two out of the last five years.
Choose a new home: If you decide to relocate, or if you stay in the same location but sell your home, you will need to decide what type of replacement housing is best suited to your needs. Should you buy a single-family home? Rent an apartment? Buy a condominium? Buy into a retirement community? These and a growing array of options are available to today’s retirees. Shop around and compare features and costs against your personal requirements and budget.
In the end, no matter where you choose to live — from Maine to Montana, in a house or an RV — home is where the heart is, and where you feel most content and comfortable.
1“Excluding the Gain” https://www.irs.gov/publications/p17/ch15.html
This article was prepared with the assistance of DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
*As reported by Financial Planning magazine, June 1996-2017, based on total revenues.
**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016 Five Star Wealth Managers